MANAGERIAL ECONOMICS PROJECT REPORT AIR DECCAN: A CASE STUDY SUBMITTED BY: AKASH JAHURI (10DCP-056) ALOK MUNJAL (10DCP-058) HARSH RAUTELA (10DCP-069) SATYARTH PANDEY (10DCP-090) SHOBIT RANJAN (10DCP-091) VARUN SEHGAL (10DCP-092) Table of Contents ABSTRACT3 THE MAN: Gorur Ramaswamy Iyengar Gopinath 4 Early life & Education5 Captain’s Commandments For Success5 Awards & honors6 The Brain Child And The Journey 7 Business Model8 Strategies9 Cost management12 Support Functions 13 Marketing and distribution14 Market Share And Impact In Pinnacle Years : 2005 and 200616 THE DEAL19
Appendix22 ABSTRACT Air Deccan is the amazing story of India’s very first and living common man who took aviation to a height which nobody thought could ever be achieved. He introduced the first low-cost airline of the country. It became one of the nation’s largest airlines in less than four years. They did this through a clever combination of innovation and outsourcing. More importantly, from a strategic perspective, it gives powerful evidence to how technology can be a key factor in changing industry dynamics, even in what were once considered fairly stable or conservative industry.
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While Air Deccan was able to capture the imagination of the public and demand grew rapidly for its services thanks to its throwaway fares, the airline itself was plagued by operational problems as it sought to aggressively expand its network and fleet size. The Man: Gorur Ramaswamy Iyengar Gopinath Gorur Ramaswamy Iyengar Gopinath or commonly known as Capt. Gopinath is the pioneer of India’s low-cost airline Air Deccan. Ex-army officer turned farmer then entrepreneur, in 1997, along with another colleague from the army, founded Deccan Aviation – India’s largest Private Helicopter Charter Company.
In 2003 he became the pioneer in launching India’s first low-cost carrier Air Deccan – the common man’s airline. A former army officer and an award winning Seri culturist, Capt G. R Gopinath, made his foray in the aviation sector way back in 1995; at a time when domestic aviation was monopolized by a handful of Full Service Airlines (FSA) and strict government regulations were the norm. He identified the potential which the helicopter charter business had in India.
Combining his entrepreneurial skills and vision with the technical skills of his ex-army friends, he launched ‘Deccan Aviation’ – a dedicated, customer focused heli-charter Company. Inspired by the “low-cost” airline model pioneered by Southwest Airlines in the United States and later emulated by other successful carriers such as JetBlue and Ryan Air, Air Deccan sought to cut the frills out of airline operations and pass on the benefit to customers. Early life & Education Captain G. R. Gopinath, Founder and CEO at Deccan Aviation and Air Deccan is a graduate of the National Defense Academy and has served the Indian Army.
He is considered the father of low cost air travel in India. He created a whole new market when he launched India`s first low cost airline, Air Deccan. Capt G R Gopinath or Gorur Ramaswamy Iyengar Gopinath or `Gopi` as he is affectionately called was born in a Hassan Iyengar family of the remote village of Gorur, Karnataka. Starting his studies in a village school, he completed his further schooling at Sainik (military) School, Bijapur. Thereafter he joined the distinguished National Defence Academy and later graduated from the Indian Military Academy as a commissioned officer in the Indian Army.
He then went on to serve the Army for eight years. Sometime in 1995, the Govt. of India started the reforms process by encouraging entrepreneurship. This inspired the entrepreneur in him to identify the tremendous potential Helicopter Charter had in India. Along with an old Army friend he decided to start a private sector commercial helicopter service in 1996 and later jumped into aviation industry with his “Budget” airline Air Deccan. Captain’s Commandments for Success Never Give Up!
For six years Captain Gopinath slept under a thatched roof and tried to make living by growing bananas, cereals, coconuts, and vegetables in the government provided land when his ancestral land was eaten up by a dam. It was in 1985 that he switched to silkworm rearing. And he had to wait for four more years to see some success. Yes, that’s ten long years of toil, and it didn’t end with farming. When he launched Deccan Aviation, it took Captain Gopinath four years to get one helicopter on lease. At every step he faced new bundle of challenges whether they emanated from government controls, competition, or something else.
His first Air Deccan flight caught fire and everyone wrote his company off. But he says that he’s been an optimist who always refused to give up. He faced all challenges head on, to give India Air Deccan that boasts about fastest aircraft turnaround time, cost efficiency, wide connectivity, and ticketing access. Pursue Your Passion Captain Gopinath stresses that one should pursue his passion and never let fear of failing come in the way. The problems will come and failures are unavoidable but having single minded focus, determination, and ability to assimilate failures is the only way forward, he believes.
From army, farming and deals, to aviation, Gopinath has had one dream that is to make a difference and in spite of all odds he continues to pursue that. Awards ; honors * Rolex International Award for Enterprise – 1996 * Entrepreneur of the year-National Academy of Management, Entrepreneurship * Centennial Excellence Award-Rotary International – 2004 * Best Entrepreneur of the year-Hutti Gold Mines – People’s skill foundation – 2005 * Personality of the decade-K. G Foundation, Coimbatore – 2005 * Business Leader Award-World HRD Congress – 2005 Startup entrepreneur of the year-NITIE – Entrepreneurship Excellence Awards – 2005 The Brain Child and the Journey Gopinath was a serial entrepreneur who had earlier been a commissioned officer in the Indian army. After discharge from the army he took up the challenge of farming barren land given to his family as compensation for land that had been submerged due to a dam project. Since it proved to be difficult to grow conventional crops in this land, Gopinath finally turned to sericulture and developed environmentally-friendly and innovative ways of cultivating silk worms.
He won the Rolex Challenge award for his work, and his farm became a destination for governments and NGOs seeking innovations in farming. Gopinath entered the aviation business as a response to a pilot friend who did not have a job as he felt that there was good scope for a charter company in India given the distances and the economic development taking place. He started Deccan Aviation in 1997 providing chartered helicopter and small aircraft across India. Many times people would approach Gopinath (at Deccan Aviation) to travel to smaller towns but back away when they found out the price of the charter.
He saw tremendous potential for aviation in India if flying could be brought down to a reasonable price (“everyone can fly”). Inspired by the “low-cost” airline model pioneered by Southwest Airlines in the United States and later emulated by other successful carriers such as JetBlue and Ryan Air, Air Deccan sought to cut the frills out of airline operations and pass on the benefit to customers. Starting in August 2003 with turboprop aircraft that connected small towns to large cities, Air Deccan soon expanded to Airbus A-320 jet operations connecting major cities.
Air Deccan offered a single class point-to-point service, did not serve free meals or even free water on its flights, sold all tickets only through the internet or its call centre, did not pay commissions or give credit to travel agents (thereby avoiding the expensive process of managing credit and reconciliation with the travel trade), had limited staff, and outsourced as many operations as possible. To reach more customers, Air Deccan created a new network of travel intermediaries who would sell their tickets. The airline also tied up with a major oil company and the Department of Posts (Post Offices) to enhance reach.
While Air Deccan was able to capture the imagination of the public and demand grew rapidly for its services thanks to its throwaway fares, the airline itself was plagued by operational problems as it sought to aggressively expand its network and fleet size. In the process, it developed a reputation for delays, poor service and lack of reliability. While the established players – Indian Air Airlines, Jet and Sahara – initially ignored Air Deccan, the obvious demand for air travel at lower fares and the urge to fill vacant seats prompted them to start discounting fares as well.
This took the form of a limited number of seats sold at lower prices. Later, as other “low-cost” carriers entered the airline industry, discounting without the pre-purchase requirements of the Apex fares became the norm. By September 2007, Air Deccan had reached a fleet size of 40 aircraft (10 ATR-42, 8 ATR-72, and 22 A-320 aircraft). It had achieved some success in connecting distant places – it was the only carrier offering service to twelve of its destinations, and one of only two carriers offering services to six others. AIR DECCAN VISION AND MISSION Vision | To be the preferred airline in India|
Mission| To demystify air travel in India by providing reliable, low-cost air travel to the common man by constantly driving down the airfare as an ongoing mission| Business Model Air Deccan was the first Indian airline to follow “no frills, low cost” business model. Its success lay in the fact that though the model was inspired by successful low-cost airlines in other countries, it was customized to suit Indian conditions. The airline’s target passengers comprised leisure, small business and corporate customers belonging to middle class and cost-conscious customers of the affluent class.
The carrier’s airfares were comparable to railway’s upper-class fares, and at times were even lower than rail fares for select seats. Below table shows you a glimpse of the impact the airlines had on the market. | Air Deccan| Jet Airways| Rail I AC| Rail II AC| Route(One-way)| Fares(INR)| Fares(INR)| Fares(INR)| Fares(INR)| Chennai-Bangalore| 721-1500| 1370-2970| 990-1402| 614-747| Delhi-Mumbai| 1999-5499| 3120-5610| 3303-4135| 1775-2210| This helped Air Deccan to capture a vast segment of the upper-class train passengers. For eg. In Aug 2005, the airline had succeeded in attracting approximately 18-20% of upper-class train passengers.
This led to an increase in first-time fliers, which in turn resulted in an increase in the market size. Air Deccan offered fares which were approximately 30% lower than those offered by full-service airlines. Strategies As a pioneer in the low-cost aviation sector, Air Deccan was determined to make a mark for itself. A mix of strategies contributed to its success. High Aircraft Utilization High Aircraft utilization was the first of Air Deccan’s strategies as it would directly result in high revenue generation. One of the main avenues for achieving this end was reducing the airline’s turnaround time.
By doing this, the carrier automatically increased its number of flying hours, which in turn resulted in an increased number of seats available. In addition to that Air Deccan meticulously planned other processes such as aircraft selection, flight scheduling, ground handling and route selection to increase utilization rates. As a result the airlines was able to achieve utilization rates as high as 10. 44 hours which was much higher than the other airlines that ranged between 7 and 9 hours. Route Planning Air Deccan also owes its success to the manner in which it planned its operational routes.
The carrier operated from six bases, which were located in metropolitan cities of Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad and are connected by trunk routes. Further these bases are connected to other regional locations through regional routes. It followed the worldwide low-cost carrier strategy of flying on point-to-point routes. It did not connect with its other flights or with other airline’s flights; thereby eliminating waiting time between flights. This strategic move contributed significantly towards reducing the carrier’s operational and logistics costs.
As an integral part of its growth strategy, the airline explored new route options on a continuous basis. These new routes comprised those that were either not served by other airlines or those that did not have adequate flights. The airlines carried out a feasibility study before finalizing new routes. Survey took in consideration the upper-class train traffic. If the upper-class train traffic between two cities was in the range of 500-800 passengers per day, the airline recognized it as a lucrative option and began its operations.
It also took into consideration several other factors such as current air traffic volumes and availability of landing slots. Air Deccan’s strategy to pursue unexplored routes paid rich dividends as very often these routes achieved a two-pronged result – high yield and high load fator. The airline’s presence on these routes, before other competitors, gave it an additional first-mover advantage. The carries was aware that its success was dependent to a large extent on its load factor. Therefore, it discontinued a route after initial four-month period if its load factor was found to be low.
A brief overview of route operation in 2004 and 2005 can be seen from the table below. Aircraft Fleet Airlines invested a great deal of time and effort towards making the best use of its fleet. This was another factor that contributed to the airline’s success. Therefore, matching different types of aircraft with the requirements of specific routes was yet another significant strategy followed by the carrier. Smaller ATR’s were used on routes that had lower passenger traffic and lacked infrastructure to accommodate larger crafts. Larger Airbus crafts were used on the trunk routes which had higher passenger traffic.
Two features characterized all Air Deccan aircraft- a single class and a narrow seating arrangement. This led to an increase in the number of seats available thereby increasing the revenue. Dynamic Pricing Airlines’ unique pricing model was another strategy which went a long way in optimizing the airline’s yield management and load factor. In the dynamic pricing model, seats which were booked well in advance had lower fares, whereas the seats booked closer to travel date had higher fares. This helped the airline to maximize its revenues from ticket sales as well as maintain high seat occupancy.
This balance of load factor and yield enabled the carrier to augment its revenues. This pricing process was continuously monitored on a real-time basis and was governed by a defined set of rules. The airline also made use of Navitaire software to optimize its load factor and yield. Cost management In order to help translate its low-fare strategy into positive results of operations, Air Deccan strived to reduce the costs of its operations. It did so in part by seeking to simplify operations, use technology when it can reduce costs, reject technology where it can complicate operations and utsource non-core business processes. Simplifying operations can remove layers of costs, not all of which are obvious. For example, by arranging flight schedules so that an aircraft ends each crew shift at the same airport where it started that crew shift, Air Deccan could eliminate the cost of putting crews up overnight away from their homes, reduce the need for the airline to monitor crew locations between flights and streamline maintenance and other procedures related to the aircraft itself because the aircraft came back each day to the place where it started.
In addition, Air Deccan had outsourced non-core operations in an effort to cut the costs of such operations. The food and drink that is sold on board our aircraft was provided by a third party supplier, as is the in-flight magazine and in-flight screen entertainment. Air Deccan also went to manage costs (and to create revenues) through sales and barter exchanges for advertising space. A variety of internal aircraft spaces, such as storage bins, headrests, tray tables, baggage tags and boarding passes, had been leased for advertising. In addition, Air Deccan leased advertising space on the outside surfaces of aircraft.
The Air Deccan Internet site, electronic newsletter and e-brochure are also used for advertising space. In flight, the airline offered drop-down TV screens which showed freely provided video content and which also supported advertising. Air Deccan provided an in-flight magazine to passengers. The magazine was outsourced at no cost to the airline and was a revenue-generating option on a shared basis through advertising sales. As a result of advertising barter exchanges, Air Deccan was also accumulating advertising time on national television channels, newspapers and a radio channel.
Support Functions Air Deccan’s two support functions, Information Technology (IT) and Human Resources played a crucial role in the airline’s growth plan and were also major contributory factors in its success IT The manner in which the airline utilized technology to its advantage was instrumental to its success. The carrier not only used technology as a medium to reduce costs, but also used it to enhance operational efficiency and increase revenues. Air Deccan opted out of the third party GDS reservation system used by other airlines.
In doing so carrier required rapid implementation of its own customer reservation systems (CRS). They made the strategic decision to outsource the system development to a third party since they did not have adequate skills and competencies to develop on their own. Interglobe handled the CRS development. The new solution had variety of activities ranging from reservations schedules, fares, payment gateway integration, and departure control system and document production. The solution comprised three significant parts- the reservation engine, the inventory engine and the departure control system.
The reservation engine facilitated transactions with online cutomers, corporate customers, call centers, travel agents and city and airport offices on a real time basis. The CRS enabled the airlines to: * Save nearly 20% in distribution costs * Monitor yield management through available seat occupancy data * Improve cash flow via pre-payments * Sell tickets 24*7 Human Resource Air Deccan favored a ‘lean-and-mean’ approach to recruiting and staffing employees in various departments. It recorded an impressive employee growth rate that touched the 2000-mark with in a comparatively brief 30-month period from the start-up.
The airline’s strategy to pick up young professionals from university campuses or ones with little work experience paid off in a huge way as it lead to substantial reduction in the attrition. The airline had a relatively flat organizational structure, which encouraged employees to be accountable and develop a sense of ownership and pride in their work. Marketing and distribution Air Deccan targeted three market segments, which it referred to as follows: leisure travelers, business travelers and corporate travelers.
Each segment exhibited different characteristics and needs, and presented Air Deccan with different opportunities to develop its business. Leisure travelers. Leisure travelers travel for holiday / pleasure, or to visit friends and relatives, or make regular visits to their native regions or for a religious pilgrimage. Leisure travel includes advance-planned travel, generally as part of a longer break and generally booked well in advance and shorter trips, such as three-day weekends, which are planned closer to the travel date and on which a leisure traveler may be willing to spend proportionately more.
As a general matter, airlines believed that leisure travelers were highly price conscious, making them an important market for Air Deccan. Weekend getaways were also becoming increasingly popular and many new destinations had opened. Business travelers. Air Deccan used the term business travelers to refer to travelers working for small and medium enterprises, who engage in business travel at their own cost (as part owners in their business) or who are otherwise highly cost- and time-conscious due to the size of the business, and are used to travelling in, for example, air-conditioned classes on trains.
Because they pay for their travel themselves or work for a small cost-conscious organization, airline believed that business travelers were likely to be careful with travel expenditures Air Deccan was strongly focused about its value proposition, which was “low fares”. Air Deccan communicated the value proposition through: * public relations * advertising * direct marketing * Internet. Air Deccan regularly evaluated its branding and position in the marketplace in order to constantly refine communications strategy to relate to its target customers.
It targeted both existing air travelers in its three customer market segments, focusing on the value and services it could provide to each segment, and customers who travelled by rail or road, emphasizing that the airline’s low fares translate into “flying made possible” and a “better lifestyle through air travel”. To help convey its desired brand message, Air Deccan had been granted the right to use Mr. R. K. Laxman’s celebrated Indian mascot “the Common Man” as its brand ambassador.
Airline believed that the use of the Common Man helped communicate to the mass of the Indian middle-class that Air Deccan was working hard to make the dream of routine air travel a reality for Indians, and helped those same people associate themselves with that dream. Air Deccan directed customized marketing initiatives at certain of its targeted customer segments. For leisure travelers, it offered a ticket package called Value Flier, which provided multiple tickets useable over time by up to four members of the same immediate family.
The airline was also in the process of developing leisure packages with bundled hotel offerings. Air Deccan advertised principally through media channels such as print, radio and billboards and also, to a lesser extent, through television. The airline wanted to use television advertising to build emotional connect and print and billboard advertising to hammer out its “low fares” message. Air Deccan’s marketing efforts benefited from sales and barter exchanges for advertising space. A variety of internal aircraft spaces, such as storage bins, headrests, tray tables, baggage tags and boarding passes were used for advertising.
In addition, Air Deccan rented advertising space on the exterior surfaces of the aircraft. The Air Deccan internet site, electronic newsletter and e-brochure were also used for advertising space. Market Share and Impact in Pinnacle Years: 2005 and 2006 Indian domestic airlines, including Air Deccan, also competed against other forms of transport, including rail and road transport. Terrorist or other incidents that lead to the imposition of tighter security measures for air travel were just one of the possible future developments that could hinder the competitive effectiveness of air travel.
The Indian Railways are the largest transport entity in India. The market share of the different airlines on October 2005 is as given below The market share data from January 2006 clearly outlines the growth rate at which Air Deccan captured the market. Within a short span of 3 months airlines raised its market share from 11% to 19% a magnificent rise of 8% in the market share. Apart from studying the market share in the aviation sector Air Deccan also makes an interesting picture of the YOY growth of the domestic passengers.
Below is the analysis of the rise in the domestic passenger. Year Ended March 31| Domestic Sector Passengers| Year-on-Year Growth (%)| 1996| 10. 4| -| 1997| 11. 2| 7. 7| 1998| 11. 6| -1. 3| 1999| 12. 0| 4. 3| 2000| 12. 7| 5. 8| 2001| 13. 7| 7. 9| 2002| 12. 8| -6. 6| 2003| 13. 9| 8. 6| 2004| 15. 7| 12. 9| 2005| 19. 9| 26. 8| The massive growth in the years after 2003, the year in which Air Deccan commenced paints a clear picture of the impact it had, positive on the aviation and negative on the railway industry.
The picture of the Airline dominance in the economic section of the aviation industry can be obtained from the below chart which shows the rise in number of passengers over the years. THE DEAL Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a single entity from April, 2008. It would be known by a different name-Kingfisher Aviation. The merger was based on recommendations of Accenture, the global consulting firm. KPMG was asked to do the valuation and the swap ratio was decided accordingly. The merger came through on as
Vijay Mallya from Kingfisher airlines bought 26% of the stake in Air Deccan. The unification of the two carriers had to be sanctioned not only by the two panels, but also by the institutional investors, independent directors, and other shareholders. Air Deccan had four independent directors-which included prominent persons like IIM Prof Thiru Naraya, Tennis player Vijay Amritraj, and A K Ganguly, Former MD Nabisco Malaysia. After the merger, the company has a combined fleet of 71 aircrafts, connects 70 destinations and operates 550 flights in a day.
The combined entity had a market share of 33%. Gopinath would continue as the Executive Chairman and Mallaya would take charge as Vice Chairman. The charter service of the respective airlines would be hived off and operate as a separate entity. Post merger, Kingfisher would operate as a single largest (private) airline in the sub-continent. Besides, operational synergies (engineering, inventory management and ground handling services, maintenance and overhaul), the management and staff of both the airlines were integrated.
They would be stronger vis-a vis lessors, aircraft manufacturers (Airbus in this case), and will also spend less on training and employees. Costs would also reduce which is associated with maintenance of aircraft. The savings in cost would be lower by about 4-5% (Rs 300 crores) (Business Standard, June 3, 2007, 4) which is a large sum. It would result in a saving of 3 billion in the first year itself through the sharing of aircraft and workers. (Business Standard, June 13, 2007, p-13. ) Further, by devising a more optimal routing strategy it could help in rationalizing the fares.
Before the merger Air Deccan recorded a net loss of Rs 213. 17 crores on revenue of Rs 437. 82 cores for 2006-07. The company had also raised Rs 400 crores through an IPO in May 2006. The merger created a more competitive business in scale and scope to emerge as market leader. Air Deccan began its operations with one aircraft and with one flight but after the alignment with Kingfisher Airlines, had a total fleet of seventy one aircrafts-41 Airbus and 30 ATR aircraft (Business Standard, June 7, 2007, p-8). It operates 537 flights (Business Standard, June 3, 2007, p-4) and covers 70 destinations.
It offers point to point service. After the merger, it was expected that Kingfisher would focus more on the international routes while Air Deccan will give it a wider domestic reach. Also Air Deccan planned to continue as a low cost carrier while Kingfisher functioned as a full-service carrier. The average age of the Air Deccan fleet was 6. 1 years as of Apr 2006. It is also India’s largest private sector helicopter charter company, which pioneered helitourism in India. It offers point to point service. It has a secondary hub at Appendix: Financial Performance Sample